Washington and Lee University - School of Law; University of St. Thomas, St. Paul/Minneapolis, MN - School of Law

Date Written: 2017

Abstract

With the adoption of Delaware's general incorporation statute in 1899, and New Jersey's ill-fated (and short-lived) turn toward a more regulatory approach to corporate law, Delaware triumphed in the corporate chartering business. Delaware's ascendance in the corporate law market has endured for over a century, notwithstanding state competitors and the looming presence of -- and occasional intervention by -- the federal government on certain corporate law subjects. Various explanations are provided as to why Delaware continues to dominate, and various assessments have been offered as to whether, overall, Delaware's corporate law jurisprudence is beneficial or detrimental for investors. These explanations and assessments typically focus on what Delaware has done well over the years to retain its prominence, not on what, deliberately or fortuitously, it has failed to do.

This chapter addresses Delaware's remarkable silence on a central aspect of corporate governance: the various legal issues associated with executive corporate officers. Unlike the case with corporate directors, where Delaware has resolved a host of issues over many decades, Delaware has yet to provide an answer to certain basic questions pertaining to officers. These include: whether the business judgment rule applies to officers; what the applicable standard of care is for officers; why, if officers are employees and agents of the company and not of shareholders, investors can bring direct actions; the nature and contours of officer disclosure and oversight duties; whether officers may consider noninvestor stakeholders; and whether the Unocal and Revlon standards apply to officers.

This statutory and case law silence, however puzzling and long-running, and whatever its reasons -- which are described -- has served Delaware well. By not articulating legal rules that some might regard as too lax and others as too severe, but instead saying very little at all, Delaware has allowed the subject of officers to largely be addressed in other ways. These include board of director interactions with officers via ex ante employment agreements and ex post severance arrangements, increased federal regulation and sanctioning of certain officer-related conduct, litigation conducted outside Delaware, but relatively little Delaware litigation that promulgates clear rules. This chapter addresses these various dimensions of Delaware's sparse law on officers, the reasons for the scarcity, and how silence on such an important subject has contributed, ironically, to Delaware's historical preeminence. At the same time, Delaware's eventual resolution of officer-related issues is unlikely to weaken its now long-established hegemony.

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